Production

FROM FARM TO CONSUMER

The production of any tobacco product begins on the farm. Tobacco is grown around the world, principally in warm, tropical climates with rich soils. In Europe, the principal tobacco farming regions are in Greece, Italy and Spain.

Tobacco can be harvested in a range of different ways, but most stages of the process are now mechanised. After the leaves are harvested, they must be cured in preparation for consumption. This can also be done in a variety of ways, from sun-curing tobacco leaves left outdoors to hanging them in a barn to air-cure. Flue-curing involves blowing hot air into a closed barn, while fire-cured tobacco is hung in a barn by a smouldering fire. Each method gives the leaves a unique texture and flavour.

After they have been cured, the leaves are graded by hand according to length, thickness, imperfections and colour. They are then packed in bales and transported to auctions or directly sold to traders or company buyers.

Manufacturers then blend the tobacco leaves by hand, which is a crucial step for maintaining consistent quality levels given tobacco’s sensitivity to the climate, time of harvest and curing process. The meticulous hand-blending of different leaves is the key link between the farm and the factory, as it determines what varieties and proportions of tobacco are to be processed to form a blend. One tobacco blend can contain up to 20 types and grades of tobacco.

To produce a finished product, tobacco is first treated with steam, which makes the leaves supple and ready for further conditioning and blending. The blended tobacco is then stored in a conditioned area, where moisture can completely permeate the leaves. Following this, the tobacco leaves are stretched and then pressed together, before being cut into the appropriate length and width for the particular type of end product.

The cut, moistened tobacco blend is dried again in a heated, rotating drum until it is tender. The tobacco is then air-cooled, with flavours added to some blends. Before being packed, the tobacco is stored for a time in an air-conditioned room to allow the various tobacco components to blend well.

Unlike fine-cut tobacco, several types of pipe tobaccos are pressed before they are cut.

The used leaves are first stripped (e.g. the veins are removed from the leaves), resulting in shorter tobacco strands than those for fine-cut tobacco. Blending is then followed by the pressing process, during which fermentation gives pipe tobacco its characteristic identity.

The entire process of bringing tobacco from farms to consumers involves a wide range of European businesses. There are over 200 manufacturers of tobacco in Europe, and many times more wholesalers and retailers. Many small independent shops and traditional ‘tobacconists’ would not be able to survive without the vital revenue they raise from selling tobacco products, making tobacco an integral part of the European business ecosystem.

STATE OF THE INDUSTRY

The tobacco industry in Europe has undergone a huge shift in recent years. In the past, the industry encompassed many hundreds of small producers creating individualised products. But over the past 30 years, smaller firms have been acquired by larger multinational companies or have ceased activities altogether. Belgium, for example, had well over 100 tobacco manufacturers 40 years ago. The country now has fewer than ten.

Consolidation within the industry has had two main consequences: employment reductions and the elimination of traditional brands. Large companies can benefit from economies of scale with mass production and greater automation. Indeed, the number of people employed has sharply declined in recent years, accompanied by a decreasing number of small, family-run businesses that traditionally favoured employing local workers over outsourcing.

The face of the tobacco industry has changed with the disappearance of brands as well. In the past, Europe produced a remarkable variety of tobacco brands, as local producers put their own marks on their products. Consumers benefitted from a great variety in choice that has been significantly reduced.

Specialised tobacco markets are, however, the exception to this consolidation trend. The more specialised the tobacco product is, the more likely it is the producers will be small to mid-sized companies. This holds true, for example, in the markets for chewing tobacco, snuff and, to a certain extent, fine-cut tobacco.

ESTA’s membership includes companies of all sizes within the European tobacco industry. They hail from 17 countries across Europe, and the majority of members are mid-sized firms.

ESTA members manufacture fine‑cut tobacco, pipe tobacco, traditional European nasal snuff and chewing tobaccos in 10 Member States and export their products across the entire world. Skilled craftspeople expertly apply age old techniques, perfecting the mixture of dozens of varieties, tastes, smells and flavours, continuing a centuries‑old tradition of fine European heritage. Up to the end of the last century, the manufacture of tobacco in Europe encompassed hundreds of small producers creating thousands of signature products. Over the past 30 years, smaller firms have been acquired by larger multinational companies or have ceased activities altogether, leading to employment reductions and the disappearance of traditional brands. In the manufacturing countries, tobacco production is often rooted in less advantaged regions and plays locally a key economic and social role. It deserves protection and at the minimum should be considered when developing regulation.

Between 2008 and 2012, consumption of fine-cut tobacco in the EU28 increased by 37%, even though the increase varies heavily per Member State. Because of the severe economic crisis, consumer disposable income was under pressure, impacting the growth of fine-cut tobacco consumption. This increase demonstrates the price sensitivity of fine-cut tobacco smokers.

As the economic crisis subsided between 2012 and 2015, fine-cut tobacco consumption declined in the EU and the market adjusted, returning to its pre-crisis normal order.

In 2016, sales of fine-cut tobacco kept declining by 1.09% in the EU28. This long=term downward trend follows to an extent industry consolidation.

Seemingly out of step, several eastern countries still experience percentage increases in fine-cut tobacco sales whilst starting at very low sales levels. This demonstrates the buffer function of fine-cut tobacco: cigarette consumers who can no longer afford this product find in fine-cut tobacco a legal alternative to illegal cigarettes that are often smuggled from neighbouring countries outside the EU (see London Economics Study, June 2015).

Sometimes fine-cut tobacco is mistakenly presented as a “hook” to smoking because of its relatively higher affordability when compared to cigarettes.

The reality of the market shows a very different picture. In most European countries, fine-cut tobacco was and still is a niche tobacco product enjoyed by “specialist” consumers and traditional tobacco enthusiasts who enjoy fine European craftsmanship.

Few exceptions exist with high market shares in countries where fine-cut tobacco has a long history and forms part of the cultural heritage. In these specialised tobacco markets, the significance of fine-cut tobacco stems from its century-old local manufacturing.

Every year, taxes on tobacco products raise more than €100 billion for EU governments. Tobacco tax policy must be delicately balanced to safeguard government revenues, protect fair competition, jobs and public health, whilst also deterring trade in illegal tobacco. Tobacco smuggling and sales of illegal tobacco products threaten this income and society at large. The fight against illegally traded tobacco is part of a wider effort to protect EU citizens.

A successful implementation of Track & Trace will be of crucial importance, and requires workable standards that fit business and trading practices, making them likely to be internationally shared.

The EU is characterised by a very diverse and flexible excise structure, which allows each Member State to set a balanced taxation of tobacco products respecting its national circumstances, interests and objectives. Last year, excise revenues from smoking tobacco increased across the EU, even though sales declined. This clearly demonstrates the efficiency of the current flexibility left to national governments and that a “one size fits all” approach should not be considered. The few Member States (e.g. France, Netherlands) casting economic theory and the tax-bearing capacity of smoking tobacco aside had adverse effects with declining revenues whilst sales increased.

An obvious correlation exists between the highest levels of illegal and non-­domestic consumption (e.g. France, UK, Ireland, Poland and Finland) and the highest taxation rates applied to fine-cut toconsbacco, in comparison with cigarettes. The figures clearly show that any alignment of tobacco taxation, regardless of the products’ specificities, will prevent fine-cut tobacco from fulfilling its buffer function, leading to increased illegal trade of cigarettes and driving down government revenues.